Financials, Consumer Staples Author: Skye Lan Editor: Luke Sheehan Sep 21, 2021 09:53 AM (GMT+8)

A USD 10,000 GDP per capita growth means more than a figure increase. We believe the rising trend will not stop, and during which great opportunities in the major consumption sector are worth to investigate.

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Antitrust, reform in education, real estate and medical care policies, Common Prosperity... all of these show that China is undergoing earth-shaking change. These changes have brought large uncertainty, making many investors afraid to invest in Chinese projects and companies. However, over the next decade, China sure will become the world's largest economy. How to better understand the opportunities and risks of the Chinese market and deal with certainty and uncertainty is a crucial problem. EqualOcean launched a series of research, China's Future Investment Watch, hoping to provide clues for global investors.


After the new economic policy launched in 1978, China started its opening-up and reforming period. The massive land, mineral resources, and the most important thing, the low-cost labor of China made up the first stage of ultrafast GDP growth and reformed the manufacturing structure globally. 

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After all the resources were explored, China relied on capital investments to continue to empower the economy. Infrastructures were heavily built, such as real estate, railways, highways, airports.

Now, the GDP per capita in China has reached USD 10,500 in 2020, the second consecutive for China to stand beyond the 10K-dollar-hurdle, according to the World Bank based on current USD. However, when China heading over the level of GDP per capita of USD 20,000, many economic issues followed, which give more challenges to this young but extreme-speeded mega economy. Some countries were able to surpass the 'trap' between USD 10,000 and USD 12,000 have advanced technology capacity, like the US, Germany, Australia, but for those who has been hovering at the level, such as Mexico, Brazil, and Argentina, are still struggling solving the unbalance between the economic growth and industrial development. 

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The technology serves as a more important impetus than investments in this stage, the innovation-powered mode will be the key impetus for sustainable economic growth. Glady, this is something that the Chinese government has been working on. 

China is not likely to be caught

The issues, all characterized as 'middle-income trap,' means a country that attains a certain income, around GDP per capita of USD 10,000 to USD 12,000, gets stuck at that level. China is now exactly in this range. 

There are some debates around this topic. Three years ago, a previous World Bank economist – Mr. Xu Xiaonian - stated that China has already been caught in this trap, as the marginal benefits of the capital are decreasing, which means the continuous economic growth will be difficult. Other economists, represented by Li Yining, a professor from Peking university, gave their version of objection that there is no way for China to fall, as the stable politics landscape, encouraging economic growth trend, as well as the large market potentials. Also, some economists, like Ma Xiaohe, an economist works for the state, even published a book illustrating that China is exactly striding across the middle-income trap right now, and issues followed if some structure problems are not solved.

On the way to USD 20,000 per capita for China, certain factors contributed to the sustainable economy growth to step cross the USD 12,000 hurdle, like industry structure, technology advancement, urbanization, income structure… Here we discuss why EqualOcean believes that China is not likely to be caught in this trap, and will reach the level of GDP per capita of USD 20,000.

Optimizing industrial structure

The development inconsistency between economy growth and the industrialization will produce some difficulties for high-to-middle income countries continuing its GDP growth. China has been optimizing the structure, moving factors of production from low productivity sectors to higher ones, from example, from low-end manufacturing to high-end and tertiary industries.

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From 2011 to 2020, the output of service sector increased from 44.3% to 54.5%, while the manufacturing decreased from 46.5% to 37.8%. The occupation contribution ran up by 31.7% for service sector and went down by 5.2% for manufacturing. Also, 19.6% more GDP came from tertiary sectors with manufacturing 19.4% less. Apparently, the expansion in the service sector is forming a better and healthier structure.

Catching up the developed market in Technology

Like we said, technology is the key for a third rise for China, an endogenous growth. The digital power of China has been strengthening with the competitiveness index in 2018 calculated as 81.42 based on Tencent's research, ranking second globally right after the US of 86.37, surpassed many developed economies, like Singapore, Japan, England, Germany.

We can look back to Japan. By the time, Japan moved the development emphasizes new technology sectors, with the traditional industrial industries curtailed by 20%, like oil, steel, and shipbuilding. The labor and fund are transferred into sectors like communications, biology, new materials. High-end segments generally became the dominant industries in Japan, the breakthrough was made in these fields, like patents applications number, researchers scale…By doing which Japan stepping into the high-income country team without suffering much. 

Self-developed technologies are indeed crucial. According to the World Intellectual Property Organization (WIPO), China has 59,005 patent applications with a year-over-year increase of 10.6%, overran the US of 57,716 of applications and 2.59% growth. With the policies of Chinese state that encourages specialization, refinement, differentiation, and innovation of small and medium enterprises.

In 2019, 49,498 PhD students graduated from STEM (Science, Technology, Engineer, Mathematics) majors in China, significantly higher than the figure in US of 33,759. More high-end talents will contribute to this technology-driven economy growth model, as a result from the transformation from demographic dividend to talent dividend.

Upgrading urbanization to metropolitanization

Without doubt that urbanization will speed up the economy growth, however, over-urbanization might impede instead. In China, compared to most of the areas, the mega cities, like Beijing, Shanghai, Guangzhou, and Shenzhen, are sort of over-developed and too much pressure, like infrastructure and life services, are generated in those cities. Based on the situation, China launched a new urbanization strategy – metropolitanization, aiming to cast more metropolitan areas around the countries, and build 20 more mega cities to relocate the resources and ease the pressure from top cities, and form a more balanced structure. As we discussed in the previous article, this 'metropolitanization' is considered a positive influence on the long-term economy growth.

Improving the income polarization

The income polarization, represented by some Latin American economies with middle-income, happened commonly during economic development. So it goes with China, where the wealth has been centralizing to a handful population, with the Gini coefficient wandering around 0.46 to 0.49 – a relatively high range - in the past 20 years. The growth of the middle-income population is much lower than the low and high-income people, which formed a sandwich-liked structure. Compared with Japan, the imbalance of wealth distribution is more severe. The level of GDP per capita in China in 2019 is similar to the level of Japan in 1982, when it surpassed the USD 10,000 line. However, the Gini Index reported 0.465, way higher than the figure of 0.34 in Japan at that time. 

The middle class's tumbling in China, along with the expansion of the affluent population generated some interesting phenomena. With the economic growth, middle-income populations are hesitating on the so-so products and are craving for better ones, however, limited the consumption with the polarized income distribution.

The situation is indeed severe. Gladly, the Chinese government has been trying its best to work on this. Like the 'new urbanization' that will rebalance the population and resources, the inclusive finance that aims helping low-income population in income boost, the limitation on off-campus education and thus reduce certain financial burden. Policies are surely showing more affection for lower income groups who have high marginal utility. The consumption from middle-income population is expected to be spurred as well.

Increasing contribution from consumption on GDP

China has been working on changing the investment-driven mode to domestic consumption-driven mode, mainly performed as the increasing contribution on GDP from consumption, reached 54.3% in 2020, surpassed investment and net export.

China, a previous top manufacturer, is becoming a center of global consumption, by improving the added value on industries, increasing investment in R&D, and therefore producing more consumption opportunities.

Based on the forecasts from the State information Center of China, the spending power in China will constitute 16.2% in the world total expenditure volume in 2025 and 22% in 2035, from 12.1% in 2019, becoming a global consumption configuration center.

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Everything indicates that even though some issues are going, the GDP of China is still not likely to be stuck at current levels. What is more, with the building-up of the GDP per capita towards USD 20,000, the expansion and upgrade of the consumption will be the hottest topic.

What will be brought from the income growth?

With this economic development transition and the target of common prosperity in China, major consumption potential has been further exploiting, and exhibiting a multi-layered, diverse structure.

Compared to the developed countries that over 70% of the GDP come from consumption, and 80% for the US and the UK, China has 54%, means that there is still a long way to go but huge potential to be explored, especially backed by an over 1.4 billion population market. The increasing urbanization rate trend marking that USD 1,000 more in average to be spend from 1% new urban population growth – 14 million people, around USD 15 billion to 20 billion more consumption scale will be produced.

Consumption upgrade – high-end consumption

The fourteenth five-year plan specifies improving policies on duty-free business and building high-end consumption districts. The spending of the rich population that focuses on high-end consumption has been increasing. During first quarter of 2020, right before the pandemic, the total retail sales from large shopping complex and higher-end outlets center grew 5% more faster than the total retail sales, compared to the same time period in 2019.

For example, the sales of auto decreased but premium vehicles went up, sales of alcohol went down but high-end liquor jumped up, sales of cup noodles dropped while organic food increased. Plus, the high-scale services, such as advanced electronic products, cosmetics, high-end healthcare are going to take more market. 

For example, Nielsen stated that electronics ranked highest for Chinese consumers among higher-end products. With more customized and variation of devices invented, the sector is going to be popular among affluent people.

Cosmetics will be another one of the top benefits from the GDP climbing progress. Compared to the story in Japan, in which the cosmetic consumption grew fastest from 1970 to 1995, during which time the country achieved GDP per capita of USD 10,000 in 1983, and USD 20,000 in 1987. What is more, we can take a page from Korean history as well. Korea achieved USD 10,000 GDP per capita in 1993 and doubled in 2006. During the period the cosmetics industry reached its highest growth historically.

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At the same economic stage that doubling GDP per capita from USD 10,000, China has more population and less cosmetic spending, where the cosmetics industry will thrive. 

Z and Y-generation: lower-boundary of middle class

Z and Y-generation (Z-gen and Y-gen) refers to the 1980s as starting birth years and the early 2010s as ending birth years, now consisting of over 40% of the total population in China. Z-gen. to be specific, born after mid 90s, is at a scale of 351 million in China, even more than the total population of the US. The Z-gen and Y-gen are mostly single children in the family, and have higher passion for life than the X-generation or even earlier, and have inherited more wealth from the last generation. Also, they have more exposure on digital marketing from the Internet, and tend to chase after the internet celebrities, and affected more by social medias.

They are now recognized as the lower boundary of middle class in China, which is considered to become the main spending power in the very short future. These customers have higher education level, which will emphasize more on quality, designed and customized services and products.

They now consist of the most urban population, therefore, along with the urbanization progress, some city-driven retail sectors will be boosted, represented by the food including healthier food, coffee, tea beverage.

For example, from 2008 to 2018, when Shanghai's GDP per capita increased from USD 10,000 to 20,000, Starbucks ushered its speedy expansion locally, in terms of the numbers of store locations. Now Starbucks in Shanghai is way more ubiquitous than in New York city.

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As the entire country is chasing after Shanghai, marching to the USD 20,000 GDP per capita, great opportunities previously hidden under those sectors are being released.

Enjoying type consumption – Entertainment

Just as Maslow's hierarchy needs theory, China now has been lifted from the absolute poverty when the enjoy-type consumption emerged blossomly, represented by the travel and hotels.

In the past decade, the number of domestic travelers has been increasing way faster than the population, and the growing trend is expected to grow stably. The travel-driven income has also been rising stably, with travel numbers of tourists going up as well.

Apparently, with the increase of the resident income and spending power of Z-gen and Y-gen, the sectors like 'Chinese Airbnbs' and travel-booking platforms will be benefited.

Bottom line

So far, China has been showing no clear sign that the middle-income trap is going to happen, and most economists forecast that China will step across this trap in 2025 without difficulty. The massive population and unique urbanization process form more differentiated customer groups, and therefore indicate more market opportunities. Plus, technology development like advanced logistic networks, big data marketing strategy that China has been leading the world, letting companies reach out to target clients more precisely with lower costs. 

We believe many sectors in China will benefit from economic development progress, whereby investors should be able to explore great opportunities, especially in many domestic-bred brands, which we are going to discuss further in the next article.


EqualOcean operates offices in Beijing, New York, and Shanghai. We welcome investors interested in the Chinese market to contact us via (contact@EqualOcean.com) or visit our offices. We believe the exchange of views will make you have a clearer prediction of the future.